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Can California Employers Pay Workers with Reloadable Debit Cards?

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Employee consent may be the next hot issue

Riverside County, CAJanelly Sandoval filed a class action lawsuit against Home Depot in Riverside Superior Court on January 31,2020. The lawsuit, which has since been removed to the District Court for the Central District of California, claims that Home Depot violated Sections 201 through 203 of the California Labor Code by paying her final wages by means of a pay card. Between 2017 and 2020, it was allegedly the company’s usual practice to pay workers’ final pay by debit card, regardless of whether they were usually paid by check or through direct deposit.

The pay card was not usable at all locations, required fees for usage in some instances, and did not allow her to access all of the monies contained on the card. The net result was that she and other members of the class were not paid all of the wages due at the time of termination.

Some employers prefer paying workers with payroll debit cards rather than by check or direct deposit. Even though it is often characterized as a convenience for employees who do not have bank accounts; it’s also attractive for employers because it shifts some payroll costs to the employee. For unbanked workers, the convenience of receiving a pay card may prove to be very expensive.

It’s also against the law in California, unless it satisfies three tests:
  • The form of payment must be freely negotiable;
  • It cannot cost the employee to convert the card payment into cash; and
  • An employee must have made a voluntary choice to be paid this way.

The last requirement may prove to be a new frontier for California prevailing wage law. As recent California lawsuits dealing with mandatory arbitration clauses in employment contracts has shown, there is quite a lot to unpack in the idea of “voluntary choice” when it comes to employment agreements.

Negotiable and free to cash

California Labor Code Section 212 provides that employers must pay their employees in a form that may be cashed without delay and without a fee or discount. The form of payment has to be freely negotiable – so paying workers with chickens or other goods suitable for barter is a no go. The law also bans paying in scrip that is redeemable only at a particular place, such as the company store.

In addition, an employer cannot issue an “order, check, draft, note, memorandum, or other acknowledgment of indebtedness” unless it can be negotiated without discount. In other words, if it can be cashed only by a bank or other business that charges fee, the form of payment is also prohibited.

Otherwise, under Section 213 of the California Labor Code, employers may pay their employees in cash alternatives, including direct deposit. Employees must also receive an itemized paystub with their payment.

DLSE explanatory letters

In 2008 California’s Division of Labor Standards Enforcement (DLSE) issued two opinion letters dealing with paycheck alternatives. One of these greenlighted the appropriate use of payroll debit cards under California Labor Code section 212.

In general, payroll debit cards or “pay cards” use either a closed system (accepted at a single merchant or entity) or an open system (accepted by multiple merchants or entities). The cards at issue in the DLSE’s opinion letter were on an open system, branded by Visa and useable at an ATM or for point-of-sale (POS) transaction. On payday, employees had immediate access to their full wages by using the card. They received one free transaction per pay period.

The DLSE found the cards complied with Labor Code section 212. The met the “freely negotiable” requirement because employees could immediately access any amount of their wages on payday, either in cash or to purchase goods. The cards could be used at any VISA-member financial institution or ATM throughout California. The cards further provided the cash “without discount” because employees received one free transaction per pay period.

Significantly, the opinion letter also noted that:

“Employees are not required (italics in original) to use your pay distribution programs and may elect to receive their payroll by direct deposit in an account at their own bank or credit union.”

In other words, participation in the pay card program was voluntary.

But when is “free choice” not so free?

The Sandoval complaint is fairly short, and the lawsuit has yet to be briefed in any detail, but it appears that Janelly Sandoval may not have had the opportunity to withhold her consent to the Home Depot’s scheme for the payment of her final paycheck. That may be the point on which this lawsuit turns.

Consent is a slippery concept in employment because the negotiating position of the potential employer and the job applicant are unequal. Applicants for non- exempt jobs do not have employment contracts. Much less do they negotiate over them.

If information about the method of final payment is shared at all, it is likely buried in an employment handbook or other first day paperwork that an employee may be asked to acknowledge receipt of by signing something. That signature may be construed as consent to more terms and conditions of employment than many workers intend or even know about.

As of January 1, 2020, AB 51 prohibited California employers from including mandatory arbitration clauses in employment agreements, including employment handbooks. Enforcement of that provision has now been enjoined  by a federal court. Mandatory arbitration and consent to novel forms of payment are undeniably different issues, and courts are sometimes reluctant to reason by analogy. Nonetheless, developments in one area of California employment law may ultimately affect related areas.

As the business climate changes in response to pandemic-fueled economic pressure, it may become more common for employers to look for ways to shift costs to employees and to block worker access to the court system when that plan fails. It’s a trend worth keeping an eye on.


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